A few quick questions:
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Anyone have good examples of an LMM firm focused on turnarounds that has scaled cleanly over the last few years? Preferably something that's gone from LMM -> MM/UMM.
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Capital doesn't seem to be a big constraint for a turnaround focused PE firm. Is the real blocker to scaling one building out strong in-house operating capabilities?
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Are a lot of turnaround shops structured as independent sponsors? Seems to be the case for the most part but I've only really talked to guys doing a lot of LMM/MM deals. They all seem to cough up $2M - $5M personally then raise $10M - $20M in additional equity and that seems like more than enough cash to tackle deals that are fairly large.
(1) A great example is KPS Capital Partners.
Fund V: $6bn + $1bn Fund IV: $3.5 Fund III: $1.2 / upsized to $2.0 Fund II: $0.4
They've had an outstanding run to the extent that they were able to shift to a 30% carry (from traditional 20%) model for their latest fund. They've won several PE Hub Turnaround Deals of the Year. https://www.wsj.com/articles/kps-capital-partners-raises-7-billion-for-…
(2) I think a constraint over the last few years has been lack of turnaround opportunities. Bankruptcies were at historic lows before COVID and debt has been dirt cheap for years now. Some historically distressed focused PE firms such as Crestview have had to turn to growthier-investing. In general, growth-ier investing has outperformed special situations style investing recently. https://tradingeconomics.com/united-states/bankruptcies
Thanks, familiar with KPS! Makes sense on shifting strategies.
Where did you pull this data btw?
"In general, growth-ier investing has outperformed special situations style investing recently."
And what do you mean specifically by "growthier"?
Not sure where the commentator above pulled fund size, but Pitchbook is a great resource for most data. Helps benchmark fund performance by vintage as well which (I imagine) is very important for turnaround funds given the opportunistic nature of the strategy.
Well Pitchbook isn't free. Sources below:
https://www.wsj.com/articles/kps-capital-partners-raises-7-billion-for-… https://www.kpsfund.com/news/press-releases/2013/04/15/kps-capital-part… https://www.kpsfund.com/news/press-releases/2007/05/21/kps-capital-part… https://www.kpsfund.com/news/press-releases/2009/09/08/kps-capital-part… https://www.businesswire.com/news/home/20040302005412/en/KPS-Closes-Spe…
My statement is somewhat subjective but you'll find good evidence here and there. Growth-ier investing basically means if you do a returns attribution, more of the returns come from revenue/EBITDA growth rather than deleveraging (multiple expansion is somewhere in the middle, can often reflect growth-ier investing). Usually companies growing 15%+ YoY. I'm still referring to majority recap LBOs.
After '08, PE firms had to confront the consequences of very high leverage in many of their transactions. Was pretty standard back then to buy 5%+ YoY growing cash cow companies and pile them on with massive leverage. While leverage ratios have risen steadily since then, in my experience, the focus on growth investing has increased more materially. Some evidence: (1) a bunch of firms have chosen to create separate growth funds and mid market vehicles because of the growth successes in their core funds (BXG, Bain Cap, Advent, KKR, Permira, TPG etc.); WP has shifted to near full growth model. (2) The rise of software/SaaS investing, which are more growth bets in general. Reflected by the rise of Thoma and Vista, but also H&F etc. (3) It makes for a better PR story - operational improvements, growth etc. rather than debt paydown and dividend recaps esp after Toys R Us-like debacles. (4) In general, you've seen the "growth-ier" funds really grow - Insight, GA, Vista, Thoma, Clearlake, Francisco etc. - whereas KKR Special Sits has underperformed, Ares/Onex/Centerbridge/Cerberus have been less successful recently. There are many exceptions - KPS is certainly one, so is Platinum etc.
https://markets.businessinsider.com/news/stocks/kkr-credit-fund-revampi… https://www.pehub.com/sun-capital-makes-push-in-growth-oriented-healthc… "Sun Capital... migration to growth-oriented companies vs. the turnaround approach it was known for.." -- not uncommon to hear this.
Having said that, COVID will certainly change the landscape.
Great insight, thank you. And yes RE: Pitchbook...way pricier than it should be.
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